Confidence breeds confidence
Published on July 18, 2017
It seems Warren Buffet likes us. He really likes us. The biggest boost to the markets in June came when Berkshire Hathaway Inc. struck a deal with Home Capital to stop the company’s bleeding. It ended a drama that had been playing out for the past few months and the potential threat Home Capital’s collapse could have on the broader Canadian financial market.

Buffett’s investment in Home Capital reached beyond reigniting investor confidence in Home Capital. The day after the Berkshire Hathaway-Home Capital deal was announced, stock prices across the TSX shot up.

Warren Buffett started investing in Canada when he was 13 years old. He loves Canada. So why is it that we, as a country, at times question ourselves?  Particularly since the Canadian economy has been steadily improving for months.

In early May, the bond market signaled a five percent chance that Bank of Canada Governor, Stephen Poloz, would raise interest rates. In early July, the bond market increased the chance to 90 percent. And the bond market was right. Poloz raised the interest rate by 25 basis points for the first time in seven years, saying that interest rate cuts designed to counteract the impact of lower oil prices had done their job. Meanwhile, the loonie continues its ascent, rising from a low of just under $0.73 against the US dollar in May to $0.79 in mid-July. Markets have yet to catch the wave of optimism, but I see it as only a matter of time.

Buffett’s investment has shone a light on the confidence other countries have in the Canadian economy.

Canada’s frothy real estate is still a bargain to others

The housing market is another area where Canadians see a bubble waiting to burst, even as foreign buyers continue to see it as a bargain. I’ll give you an example. My son, Ben, works as an intern at one of the Big Six banks. He wanted to be close to the office, so he’s renting a residence room on the University of Toronto campus. Ben has his own bedroom and shares a bathroom with three others. Ben’s friend is in New York with a similar internship. He’s renting a residence room at Columbia University. Ben’s friend has a roommate and shares a bathroom with four others—and he is paying more than double the price (before any currency adjustments) that Ben does for the privilege.

In another example, I have an acquaintance who is moving from London, England, to Oakville. By comparison, he thinks Canadian housing prices are cheap. Canadians may feel that the housing market has risen too high, too fast; that it may be signalling 2008 all over again. Certainly, governments are feeling the pressure to act. I don’t believe a real estate crash is on the horizon. A correction, perhaps. We’re seeing that in the GTA following the Ontario government’s introduction of new legislation to help cool a frothy market. Yet prices continue to rise.

Canada is about to hit its stride

On July 1, Canada turned 150. Compared to the rest of the world, we’re still in our infancy. The Canadian economy is humming along at a brisk pace. Interest rates are set to rise. The dollar is climbing. From where I sit, Canada is off to a tremendous start as it embarks on a journey through its next 150 years.

I’m glad Warren Buffett has confidence in Canada, as we always have.

Sincerely,

Stephen Sisokin

President

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